Overview

We have affirmed our ‘AAA/A-1+’ sovereign credit rating on the United States of America.

• The economy of the U.S. is flexible and highly diversified, the country’s effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
• Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
• We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

Rating Action

On April 18, 2011, Standard & Poor’s Ratings Services affirmed its ‘AAA’  long-term and ‘A-1+’ short-term sovereign credit ratings on the United States of America and revised its outlook on the long-term rating to negative from stable.

Rationale

Our ratings on the U.S. rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar’s preeminent place among world currencies. Although we believe these strengths currently outweigh what we consider to be the
U.S.’s meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the ‘AAA’ level.

The U.S. is among the most flexible high-income nations, with both adaptable labor markets and a long track record of openness to capital flows. In addition, its public sector uses a smaller share of national income than those of most ‘AAA’ rated countries–including its closest peers, the U.K., France, Germany, and Canada (all AAA/Stable/A-1+)–which implies greater
revenue flexibility.

Furthermore, the U.S. dollar is the world’s most used currency, which provides the U.S. with unique external flexibility; the vast majority of U.S. trade flows and external liabilities are denominated in its own dollars. Recent depreciation of the currency has not materially affected this position, and we do not expect this to change in the medium term (see “Après Le Déluge, The U.S. Dollar Remains The Key International Currency,” March 10, 2010, RatingsDirect).

Despite these exceptional strengths, we note the U.S.’s fiscal profile has deteriorated steadily during the past decade and, in our view, has worsened further as a result of the recent financial crisis and ensuing recession. Moreover, more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.

In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.

On April 13, President Barack Obama laid out his Administration’s medium-term fiscal consolidation plan, aimed at reducing the cumulative unified federal deficit by US$4 trillion in 12 years or less. A key component of the Administration’s strategy is to work with Congressional leaders over the next two months to develop a commonly agreed upon program to reach this target. The President’s proposals envision reducing the deficit via both spending cuts and revenue increases, and the adoption of a “debt failsafe” legislative mechanism that would trigger an across-the-board spending reduction if, by 2014, budget projections show that federal debt to GDP has not yet stabilized and is not expected to decline in the second half of the current decade.

The Obama Administration’s proposed spending cuts include reducing non-security discretionary spending to levels similar to those proposed by the Fiscal Commission in December 2010, holding growth in base security (excluding war expenditure) spending below inflation, and further cost-control measures related to health care programs. Revenue would be increased via both tax reform and allowing the 2001 and 2003 income and estate tax cuts to expire in 2012 as currently scheduled–though only for high-income households. We note that the President advocated the latter proposal last year before agreeing with Republicans to extend the cuts beyond their previously scheduled 2011 expiration. The compromise agreed upon in December likely provides short-term support for the economic recovery, but we believe it also weakens the U.S.’s fiscal outlook and, in our view, reduces the likelihood that Congress will allow these tax cuts to expire in the near future. We also note that previously enacted legislative mechanisms meant to enforce budgetary discipline on future Congresses have not always succeeded.

Key members in the U.S. House of Representatives have also advocated fiscal tightening of a similar magnitude, US$4.4 trillion, during the coming 10 years, but via different methods. House Budget Committee Chairman Paul Ryan’s plan seeks to balance the federal budget by 2040, in part by cutting non-defense spending. The plan also includes significantly reducing the scope
of Medicare and Medicaid, while bringing top individual and corporate tax rates lower than those under the 2001 and 2003 tax cuts.

We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.

Standard & Poor’s takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate. But for any plan to be credible, we believe that it would need to secure support from a cross-section of leaders in both political parties.

If U.S. policymakers do agree on a fiscal consolidation strategy, we believe the experience of other countries highlights that implementation could take time. It could also generate significant political controversy, not just within Congress or between Congress and the Administration, but throughout the country. We therefore think that, assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden. In addition, even if such measures are eventually put in place, the initiating policymakers or subsequently elected ones could decide to at least partially reverse fiscal consolidation.

In our baseline macroeconomic scenario of near 3% annual real growth, we expect the general government deficit to decline gradually but remain slightly higher than 6% of GDP in 2013. As a result, net general government debt would reach 84% of GDP by 2013. In our macroeconomic forecast’s optimistic scenario (assuming near 4% annual real growth), the fiscal deficit would fall to 4.6% of GDP by 2013, but the U.S.’s net general government debt would still rise to almost 80% of GDP by 2013. In our pessimistic scenario (a mild, one-year double-dip recession in 2012), the deficit would be 9.1%, while net debt would surpass 90% by 2013. Even in our optimistic scenario, we believe the U.S.’s fiscal profile would be less robust than those of other ‘AAA’ rated sovereigns by 2013. (For all of the assumptions underpinning our three forecast scenarios, see “U.S. Risks To The Forecast: Oil We Have to Fear Is…,” March 15, 2011, RatingsDirect.

Additional fiscal risks we see for the U.S. include the potential for further extraordinary official assistance to large players in the U.S. financial or other sectors, along with outlays related to various federal credit programs. We estimate that it could cost the U.S. government as much as 3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie Mac, two financial institutions now under federal control, in addition to the 1% of GDP already invested (see “U.S. Government Cost To Resolve And Relaunch Fannie Mae And Freddie Mac Could Approach $700 Billion,” Nov. 4, 2010, RatingsDirect). The potential for losses on federal direct and guaranteed loans (such as student loans) is another material fiscal risk, in our view. Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008, as our downward revisions of our Banking Industry Country Risk Assessment (BICRA) on the U.S. to Group 3 from Group 2 in December 2009 and to Group 2 from Group 1 in December 2008 reflect (see “Banking Industry Country Risk Assessments,” March 8, 2011, and “Banking Industry Country Risk Assessment: United States of America,” Feb. 1, 2010, both on RatingsDirect). In line with these views, we now estimate the maximum aggregate, up-front fiscal cost to the U.S. government of resolving potential financial sector asset impairment in a stress scenario at 34% of GDP compared with our estimate of 26% in 2007.

Beyond the short- and medium-term fiscal challenges, we view the U.S.’s unfunded entitlement programs (such as Social Security, Medicare, and Medicaid) to be the main source of long-term fiscal pressure. These entitlements already account for almost half of federal spending (an estimated 42% in fiscal-year 2011), and we project that percentage to continue increasing as long as these entitlement programs remain as they currently exist (see “Global Aging 2010: In The U.S., Going Gray Will Cost A Lot More Green,” Oct. 25, 2010, RatingsDirect). In addition, the U.S.’s net external debt level (as we narrowly define it), approaching 300% of current account receipts in 2011, demonstrates a high reliance on foreign financing. The U.S.’s external indebtedness by this measure is one of the highest of all the sovereigns we rate.

While thus far U.S. policymakers have been unable to agree on a fiscal consolidation strategy, the U.S.’s closest ‘AAA’ rated peers have already begun implementing theirs. The U.K., for example, suffered a recession almost twice as severe as that in the U.S. (U.K. GDP declined 4.9% in real terms in 2009, while the U.S.’s dropped 2.6%). In addition, the U.K.’s net general government indebtedness has risen in tandem with that of the U.S. since 2007. In June 2010, the U.K. began to implement a fiscal consolidation plan that we believe credibly sets the country’s general government deficit on a medium-term downward path, retreating below 5% of GDP by 2013.

We also expect that by 2013, France’s austerity program, which it is already implementing, will reduce that country’s deficit, which never rose to the levels of the U.S. or U.K. during the recent recession, to slightly below the U.K. deficit. Germany, which suffered a recession of similar magnitude to that in the U.K. (but has enjoyed a much stronger recovery), enacted a constitutional limit on fiscal deficits in 2009 and we believe its general government deficit was already at 3% of GDP last year and will likely decrease further. Meanwhile, Canada, the only sovereign of the peer group to suffer no major financial institution failures requiring direct government assistance during the crisis, enjoys by far the lowest net general government debt of the five peers (we estimate it at 34% of GDP this year), largely because of an unbroken string of balanced-or-better general government budgetary outturns from 1997 through 2008. Canada’s general government deficit never exceeded 4% of GDP during the recent recession, and we believe it will likely return to less than 0.5% of GDP by 2013.

Outlook

The negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years. The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.

Some compromise that achieves agreement on a comprehensive budgetary consolidation program–containing deficit reduction measures in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013–is our baseline assumption and could lead us to revise the outlook back to stable. Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.

Standard & Poor’s will hold a global teleconference call and Web cast today–April 18, 2011–at 11:30 a.m. New York time (4:30 p.m. London time). For dial-in and streaming audio details, please go to www.standardandpoors.com/cmlive.

Three men resigned last week — two from their current posts, and one pre-emptively (more or less) from a job he was expected to take.

All three moves will have an impact on financial markets. So let’s take a look…

Resigner No. 1: Hosni Mubarak

There was a moment of drama on Thursday as Hosni Mubarak, Egypt’s embattled dictator — sorry, Joe Biden — refused to announce he was stepping down as the world anticipated.

After a rambling speech by Mubarak on Thursday night, in which the words “I quit” or “I hereby resign” were not spoken, there were fears of new chaos and protester outrage. The CIA (Central Intelligence Agency) looked openly perplexed and the WSJ spoke of how the situation was “slipping out of control.”

But then Hosni had a change of heart. Either that, or someone twisted his arm damn hard (probably the latter), because on Friday it was, indeed, confirmed that Egypt’s 30-year ruler would step aside.

As Egyptians rejoiced in Tahrir Square, the price of oil dropped like a stone. The threat of new buildup in the geopolitical “fear premium” — a heavy weight to take into the coming days and weeks — had suddenly been lifted.

In the short run at least, Mubarak’s exit has given room for markets to embrace a new “risk on” bid as the threat of Middle East turmoil fades.

This does not tell us how things will play out in the medium to longer term, and it certainly does not rule out new complications. But Mr. Market is more likely than before to breathe an extended sigh of relief — and continue in his U.S. recovery-oriented ways.

Resigner No. 2: Kevin Warsh

The second man to resign, Kevin Warsh, was considered one of the last remaining “hawks” on Federal Reserve Board of Governors.

Mr. Warsh, who will step down at the end of March, was previously an aide to President Bush and an M&A specialist on Wall Street — and, more importantly, one of the few dissenting voices on “QE2″ (quantitative easing). As The New York Times observes,

[Warsh] was the only governor with close ties to Republicans in Congress and to conservative organizations, like the Hoover Institution.

With his departure, the Fed board loses that link to conservatives at a time when conservative economists and some Republicans on Capitol Hill are sharply critical of the Fed chairman, Ben S. Bernanke, and his policies.

The central bank looks to be increasingly dominated by so-called doves, who emphasize policies intended to create jobs and economic growth equally with fighting inflation, rather than those known as hawks, for whom stable prices and low inflation are paramount.

With Warsh on his way out, we can expect further domination of the doves, as the president’s replacement will certainly be dovish also. This increases the odds of prolonged low interest rates, a continued relaxed stance in the face of stealth inflation pressures, and a greater likelihood of “QE3″ if it comes to that.

Given that Wall Street is to stimulus as Rush Limbaugh is to OxyContin, the news of Mr. Warsh’s departure will only be celebrated by the bulls. It is another case of “eat, drink and be merry,” for tomorrow is too far away to worry about when paper profits can be accumulated here and now riding the wave of cheap and easy money provided by a blind and morally compromised Fed.

(This isn’t the first time I’ve spoken about the Federal Reserve. Sign up for Taipan Daily to receive all of my investment commentary.)

Resigner No. 3: Axel Weber

The third man on our list is a bit of an odd duck: Axel Weber, president of the Bundesbank (Germany’s Central Bank).

Mr. Weber had long been considered next in line for the job of heading up the ECB (European Central Bank) when the current president, Jean-Claude Trichet, steps down.

Angela Merkel, Germany’s Chancellor, had also put great hope in Mr. Weber as a source of political stability. We’re nervous Germans to see a fellow inflation hawk and sound money advocate running the ECB, Merkel’s people reasoned, they would then feel better about the fortunes of the euro.

But now Mr. Weber has taken himself out of the running for the ECB job, much to Chancellor Merkel’s annoyance and dismay. She is likely to boot Mr. Weber out of his Bundesbank job in payback.

So why the shift? Because Weber is hard and rough where an ECB man need be soft and smooth. As Bloomberg reports:

Where Trichet is smooth, Weber’s public objections to buying bonds and cutting interest rates suggested he placed the primacy of his own views on beating inflation and maintaining central bank independence above the need to appease politicians or strike a consensus with colleagues.

“It’s like he’s wanting to prove he’s not the right person,” said Christoph Kind, head of asset allocation at Frankfurt Trust…

“Not the right person” indeed. Given his stance as a hard-nosed inflation fighter in keeping with Bundesbank tradition, Mr. Weber may have realized the ECB job would require him to flush his principles and ideals down the toilet.

The man to next head the European Central Bank will be in charge of a can-kicking dog-and-pony show, and will quite possibly need the glib demeanor of a used car salesman, in attempting to convince the world the euro is not being trashed and debased, even as further back-door bailouts accomplish exactly that.

As we have written in the past in these pages, Europe has no clear exit from its ongoing sovereign debt crisis other than an ugly program of monetization and devaluation. The credibility of the ECB, and the soundness of the euro itself, will have to be sacrificed for the sake of saving the peripheral economies.

The only alternative, when it comes down to it, is for the debt-burdened collapse of one periphery country (Portugal? Spain? Italy? Ireland?) to create a domino chain of collapses and/or defaults, in which the whole project goes belly up anyway.

Mr. Weber, being nobody’s fool, may see the writing on the wall — in which case it would count as good Teutonic sense to say he’ll have no part of that, thanks very much.

And so we have a hat trick of bullish implications for the near term, but at least two of these shifts boding ill for the longer term… and possibly all three, given we don’t know what Egypt’s next regime will be. (Democratic Islamic Republic anyone?)

Overdose: The Next Financial Crisis

Global Research Video

http://tv.globalresearch.ca/2011/02/overdose-next-financial-crisis

by Omid Malekan
www.omidmalekan.com

Now with less crunch.

Dear Friend of GATA and Gold:

As you may have seen from the Bloomberg News story dispatched to you previously today,(http://www.gata.org/node/8352), Federal Reserve Chairman Ben Bernanke is to appear next week before the banking committees of Congress to present the Fed’s semi-annual report on the economy. Presumably Bernanke will be subjected to the usual questioning by committee members. The problem, of course, is that these questions are seldom very compelling and so elicit little about the Fed’s secret, market-manipulating actions.

With your help, we can change that next week.

After all, what if a committee member asked Bernanke about the Fed’s gold swap agreements with foreign banks, agreements the Fed admits having and insists on keeping secret, agreements about which GATA is suing the Fed for access under the U.S. Freedom of Information Act?

Of course Bernanke might weave, dodge, and evade such questions, but then the issue would be squarely on the table.

These are the key questions for Bernanke:

1) Will you confirm the substance of Fed Governor Kevin M. Warsh’s letter of September 17, 2009, to the Gold Anti-Trust Action Committee, to the effect that the Fed has gold swap agreements with foreign banks and insists on keeping those agreements secret? (For a copy of Warsh’s letter, see http://www.gata.org/node/8192.)

2) What is the purpose of the Fed’s gold swap agreements?

3) Have any of these agreements ever been implemented? If so, exactly how, why, and when?

4) How do those agreements affect the U.S. gold reserves?

5) Why must the Fed keep these agreements secret? What would happen if the public, the markets, and Congress knew what the Fed was doing in the gold market? Will the Fed disclose those agreements to Congress? If not, why?

If you’re a U.S. citizen, you can help put these questions to Bernanke and thus hasten the end of the gold price suppression scheme by urgently contacting your U.S. representative and U.S. senators and ask them to see that Bernanke is asked about the gold swaps. You especially can help if your U.S. representative or either of your U.S. senators is a member of the House Financial Services Committee or the Senate Committee on Banking, Housing, and Urban Affairs, the committees that will question Bernanke directly.

You can find a list of members of the House Financial Services Committee here:

http://financialservices.house.gov/members.html

A list of the members of the Senate Banking Committee is here:

http://banking.senate.gov/public/index.cfm?FuseAction=CommitteeInformati…

You can identify and locate your U.S. representative here:

http://www.house.gov/

You can identify and locate your U.S. senators here:

http://www.senate.gov/

For this to have a chance with Bernanke’s testimony next week, you’ll have to try to reach your U.S. representative and senators on Monday. Please do try. All it will take is one member of Congress to raise the issue during the hearings. Thanks for your help.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *
Support GATA by purchasing a colorful GATA T-shirt:

http://gata.org/tshirts

Or a colorful poster of GATA’s full-page ad in The Wall Street Journal on January 31, 2009:

http://www.cartserver.com/sc/cart.cgi

Or a video disc of GATA’s 2005 Gold Rush 21 conference in the Yukon:

http://www.goldrush21.com/

* * *

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

http://www.gata.org

To contribute to GATA, please visit:

http://www.gata.org/node/16

NOT THE FEDERAL RESERVE

Here’s a new video from Dr. Paul, telling us about Ben Bernanke’s testimony. How much more interesting Congress is thanks to Ron Paul, the one truth teller. Without him, it’d be a lot of bootlicking questions and waving of incense before the sacred Ben. (And P.S.: Dr. Paul’s book The Revolution: A Manifesto, which explains all these issues in layman’s terms, will move up on the New York Times bestseller list from #23 this Sunday to #17 on the list for July 27.)

Source: http://www.campaignforliberty.com/